What is a tax deduction, and what types of deductions are there
A tax deduction is a statutory provision allowing a reduction in the taxable base or the tax amount payable based on specific expenses or grounds. Essentially, it enables the recovery of previously paid tax or a reduction in the current tax burden, provided that conditions are met and expenses are documented; a solo practice tax deduction checklist can assist with this process.
There are several main types of tax deductions: standard, social, property, investment, and professional. Each type serves specific purposes and carries its own limitations—such as supporting families, compensating for education and medical costs, incentivizing home purchases or long-term investments, and accounting for expenses incurred in generating income.
How the personal income tax refund mechanism works
The personal income tax refund mechanism operates by allowing the state to reduce the taxable base or the tax already withheld by an amount linked to specific expenses or benefits. If personal income tax was withheld from a citizen’s income at a rate of 13% (or other rates subject to specific rules) during the year, a portion of the paid tax may be refunded if the individual is eligible for a deduction.
The refund is processed at the end of the tax period: the citizen substantiates their eligibility for the deduction with documents and claims it in the prescribed manner. The refund amount is generally capped at the total personal income tax actually paid for the relevant year; one cannot receive a refund exceeding the amount withheld, even if the expenses qualifying for the deduction were substantial.
Two main ways to claim a deduction
A deduction can be claimed either through the tax authority or through an employer. When applying to the tax authority, the taxpayer submits a tax return and supporting documents; the tax authority then verifies the information and decides on the refund of the overpayment.
When claiming the deduction through an employer, personal income tax (PIT) withholding stops (or is reduced) during the year until the deduction limit is reached.
- Via the tax authority: the refund is issued after eligibility for the deduction is confirmed following the period in which income was earned and PIT was withheld.
- Via the employer: the financial benefit takes the form of a higher “net” salary resulting from reduced current tax withholdings.
Who is eligible for a PIT refund
Citizens are eligible for a PIT refund if they have actually paid PIT (usually via employer withholding) and simultaneously meet the criteria for a specific tax deduction. In practice, this most often applies to individuals working under employment contracts or other agreements subject to PIT withholding, as well as individuals who have self-declared income and paid the tax.
Individuals may claim the deduction if they meet the conditions for a specific type of deduction and can provide proof of expenses or eligibility for the benefit. The most common scenarios involve social deductions (e.g., medical treatment, education), property deductions (home purchase, mortgage interest), and investment deductions. However, it is important to note that if there is no taxable income or if the total tax withheld for the year is zero, a refund is not possible; the right to the deduction may be carried forward or exercised differently, depending on the specific type of deduction and applicable rules.
- You must have income subject to PIT and verified grounds for the deduction.
- You must choose the method of claiming it: through the tax authority or through your employer.
- You must prepare documents confirming your eligibility for the deduction and the expenses incurred.
